Pay off bond or add to RA?

PAYING OFF DEBT IS ALWAYS A GOOD IDEA.

Question: Due to poor market performance, the monthly fund value on my retirement annuity keeps decreasing despite my constant monthly contribution of R26 000. Would it be more advantageous for me to put my monthly contribution into my mortgage access bond for the foreseeable future? I owe R850 000 on my house and my monthly mortgage payment is approximately R12 500. I’m 64 and hope to retire in two years’ time. This question highlights the importance of a holistic approach to personal finances. The danger of putting all your contribution efforts into your home is that, although you’ll have a roof over your head, you’ll have a decreased retirement maturity value, a reduced income post-retirement and an inability, or reduced ability, to maintain your current or desired standard of living.

You must follow a holistic approach that both reduces your debt and builds up growth assets.

That being said, being bond free is probably one of life’s sweetest pleasures. Paying off debt is always a good idea. Here are advantages of paying extra into your bond:

It’s risk free – the money you put in cannot be wiped out It’s tax free It’s inflation beating if the interest rate is above inflation

It’s low cost – there are no extra fees involved

It’s highly liquid – you can always take the money out again if needs be.

Given the two-year period and the outlook on market performance over that period, I’d say that paying extra into your home loan is definitely a great idea.

Short term, the interest saving on your bond will probably be higher than the return earned on your RA, especially with your current administrator, fees and investment strategy.

However, I say this not having done a full financial needs-analysis so this is just my personal opinion and shouldn’t be taken as advice in accordance with the FAIS Act.

Your question requires a lengthy explanation/comparison on risk and return expectations of different asset classes and investment products.

If you want to lower financial risk in your life, reduce your exposure to debt (like your bond).

If you want to provide adequately for your retirement, keep investing in your RA, but ensure you’re invested according to your investment time horizon.

Never try to time the market – it’s futile. The plan to return when things turn for the better is a shaky plan at best.

Speak to a wealth-manager, do a full financial needs-analysis and get a personalised answer.

Mduduzi Luthuli is the co-founder and an executive director of Luthuli Capital.